Author and organizational development consultant Kaleel Jamison once said that relationships are “like sand held in your hand…the minute you close your hand and squeeze tightly to hold on, the sand trickles through your fingers.” The same could be said of vendor relationships.
A growing number of plan sponsors are turning to vendor search consultants for assistance with their evaluation and selection of third-party benefits administrators. Writing and running an RFP is extremely time-consuming, so it’s understandable plan sponsors would want to outsource the process. The problem is that vendor search specialists often lack experience in the benefits administration arena. To prove their worth, they focus on negotiating lower fees above all other considerations — and sometimes they cut too deep. The resulting contracts come with attractive price tags, but they set plan sponsors up for a downstream nightmare of quality and service issues that negatively impact both plans and their participants.
Administrators aren’t in business to lose money
Don’t get me wrong; plan sponsors should negotiate the lowest reasonable price available for their desired service set. But browbeating a vendor into a cost structure that is unprofitable serves no one. When you squeeze a vendor too tight, you lose the right to command its best resources. Benefits administrators that take a beating on price have no choice but to find a way to make the deal financially feasible, and that usually means assigning cheaper resources to your account (and saving better ones for higher-paying clients). Plan sponsors may notice a lot of turnover on their administration teams and will almost always experience a decline in overall servicing quality and participant satisfaction. Quality issues ranging from poor recordkeeping to forgotten government filings may surface.
Dealing with these issues will distract the HR team from its core responsibilities, and as matters escalate, they may reach the ear of the CEO — causing even bigger headaches for HR.
What To Do
Plan sponsors who cut vendor fees to the bone will have limited recourse when it comes to correcting unsatisfactory service. Most plan sponsors don’t negotiate meaningful service-level agreements (SLAs) to start with, making it hard to hold administrators financially accountable for poor participant or plan sponsor servicing. Even in the event that SLAs are enforceable, sticking the vendor with financial penalties often only serves to make the underlying situation worse. The little bit of monetary recompense plan sponsors receive will not make up for ongoing issues with administration service and quality.
Instead, plan sponsors should approach vendor selection with greater circumspection in the first place. For starters, unsolicited come-ons from vendor search consultants should be scrutinized with a discerning eye. If a consultant promises to slash benefits administration costs by 20 percent before ever taking a meeting with the plan sponsor, odds are good they’re basing that claim solely off information published in the plan’s Form 5500 filing.
While Form 5500 does contain certain information about ERISA plans, including the number of participants and the dollar amount of fees paid to service providers, it does not illuminate the scope of services performed by those service providers. A blanket promise to reduce fees is meaningless without an understanding of the plan’s unique complexities, the service set its administrator provides and the SLAs it is beholden to.
It’s reasonable to expect that a reduced scope of work will result in lower fees. Likewise, if a plan sponsor has reason to believe it is paying more than the fair market price for the administration of a benefits plan, then it certainly makes sense to renegotiate or seek a new administrator.
But plan sponsors have all sorts of reasons for switching benefits administrator that don’t have anything to do with money. Participant complaints may reveal inherent customer service issues. An audit may uncover calculation or recordkeeping issues that expose plan sponsors to risk. And many companies have procurement policies that require service providers be re-evaluated on an annual or periodic basis regardless of the plan sponsor’s level of satisfaction with the vendor.
In all cases, plan sponsors are best served when their RFPs describe in detail the organizations’ objectives, required service set and expected SLAs. This is the only way to ensure a true, “apples to apples” comparison of vendor proposals and pricing. Search vendors cannot meaningfully estimate fair market pricing just because they’ve worked with a company that is similar in size to your own. They will need to compare not just similarly sized companies, but also companies that require a similar service set.
Finally, look for a search vendor with experience not just in employee benefits generally, but in benefits administration specifically. A consultant that understands the financials of outsourced administration operations will know how low they can go on a negotiated price without squeezing too tight.